Metal stocks lose luster after Moody's downgrades China

"We expect direct government, indirect and economy-wide debt to continue to rise, signalling an erosion of China's credit profile", Moody's said in a statement.

The government has trimmed this year's growth target to around 6.5 per cent after it expanded 6.7 per cent last year, the slowest growth rate since 1990.

A spokesman for the Ministry of Finance said Moody's report "overestimated the difficulties faced by China's economy, and underestimated the Chinese government's capability to deepen the supply side structural reform and moderate expansion of gross demand".

For the first time since 1989, a major debt rating agency downgraded their outlook on China.

The country is trying to contain financial risks and to avoid asset bubbles forming while maintaining growth.

Moody's also forecast that China's growth potential will decline to about 5 per cent in the next five years, for reasons including a smaller working age population and a continuing productivity slowdown. But it is worth noting that most of this debt is held by Chinese state-owned enterprises or "quasi-state" like entities - not worldwide investors - so it is less likely to have a spillover effect into other economies.

However, the agency changed its outlook to stable from negative, saying risks are now balanced and growth will likely remain relatively strong. The finance ministry noted the growth rate ticked up to 6.9 percent in the quarter ending in March and said tax revenue rose 11.8 percent in the first four months of the year.

The decision from Moody's follows growing concern among investors over the levels of debt building in the Chinese economy.

Mei said China's economic performance this year had exceeded market expectations and criticized Moody's for including debt at state-owned enterprises (SOEs) and local government financing vehicles as indirect government liabilities.

China's main stock index fell one percent and the Australian dollar slipped on Wednesday after Moody's cut its sovereign credit rating on China. With external debt sitting at just 12 percent of GDP, the downgrade may not prove as damaging to China as it would for an economy more reliant on global borrowing.

China's economic growth may face more headwinds in the second half, sparking risk aversion at some point late this year.

Moody's added that the reform programme is likely to slow rather than prevent increasing leverage. The poorer the rating ascribed then the greater the possibility that an investment might fail to deliver its promised return and, therefore, the higher the interest that an issuer needs to pay to attract the punters, er investors.

Moody's put China on a negative outlook in March of past year, with S&P following suit four weeks later.

He also said the Belt and Road initiative will help Hong Kong businesses enter new markets, boosting the city's economy, adding China is also a "key source of growth" for the global economy.

  • Zachary Reyes